The Rise Of Circular Debt 3.0 – Mohsin Khalid

On مئی 14, 2014 70

In June last year the government cleared Rs503 bln of outstanding dues of power-sector entities including IPPs, Gencos, oil and gas companies that had piled up due to short collections by the Discos. After deducting liquidated damages of Rs23 billion, payments of Rss480 billion were made.

After this payout circular debt was almost wiped clean as outstanding payables of the entire sector at that time stood at a mere Rs81 billion. By end December that figure had crossed Rs180 bln, Rs 270 bln by end March and is now widely acknowledged to have crossed Rs300 bln by end April. Though estimates may vary, one thing is certain: for the first time PSO defaulted on its international payment obligations in the range of Rs100 bln this last week or so owing to receivables against power sector.

Circular debt is back, and with a vengeance. The primary culprit is receivables of distribution companies that are constantly increasing, up by Rs90 bln in nine months, from Rs411 bln in June last year to Rs503 bln in March 2014. Collection rates have fallen since the government took, and most disturbingly, distribution ‘losses’ have stood almost stagnant, now at 16.1 percent despite the much hyped and highly vocal anti-theft campaign.

But last June wasn’t the first time the power mandarins attempted to solve a crisis by taking short-cuts and simply throwing money at the problem. In August 2012, the then government browbeat a consortium of local banks to lend Rs136 bln to the Power Holding Company Ltd. (PHCL), the Ministry of Water & Power’s bad-debt black-hole where all circular debt is parked without actually having to pay it off. This borrowing was then transferred onto the books of the Discos and to this day the consumers, unknowingly, pay the mark-up on this borrowing in their bills as part of their electricity tariff.

As is expected, that increased generation for a few weeks and gave the government of the day some temporary relief from the outcry it was facing. More money was pumped into the system subsequently, in smaller tranches. The finance ministry released Rs23 bln in May 2012, Rs43 bln in Feb 2013, Rs10 bln in March 2013 and Rs20 bln this month. Add to this the Rs221 bln the government has paid in tariff differential subsidy since April 2013 and pretty soon you start talking real money.

The chronic issues behind circular debt are now breakfast table conversation in every Pakistani household, producing a few million ‘energy experts’! Short remittance by Discos in the wake of less collections, excess line losses than determined by Nepra, non-release of subsidy by the government etc. Add to the mix another administrative phenomenon: adverse court judgements delaying tariff notifications. The list is long.

But how did we get here, yet again, less than a year after that massive Rs480 bln payout? The seeds of the re-emergence were in fact sown the very minute the finance minister wrote out those fat cheques.

This time last year, the new government was eager to reduce loadshedding to demonstrate to the voters that it alone had the panacea to the nation’s energy crisis. As part of the quid-pro-quo of the payout, the IPPs were asked to ramp up power production.

With their long-outstanding receivables cleared and their coffers filled (and sovereign guarantee in place), power producers were more than happy to oblige. So NTDC went on a power buying spree, buying an additional 17,000,000 kw/hrs a day from the most expensive source in its generation repertoire, the thermal based IPPs, at an average of 16 cents/unit, with the rupee-dollar parity then hovering at Rs108 per dollar. Do the math.

In a devastating move for the sector, to prevent public pouring onto the streets weeks, in July last year the new government increased loadshedding of the industrial sector to 14 hours a day diverting all that extra power to domestic consumers, in the process claiming it had alleviated loadshedding. This continued till September when supply to industry was increased by four hours only.

Industrial and commercial consumers in the entire power sector have long subsidised residential consumers. Almost zero losses on dedicated industrial feeders and recovery rates above 99 percent from industrial consumers have also ensured lower tariffs for domestic consumers. The average sale rate for commercial consumers is Rs21.1, for industrial consumers Rs16, while average sale rate for domestic consumers are Rs9.3 per unit.

The vital importance of industry can be gauged from the fact that nationwide industrial consumers comprise only 1.3 percent of the consumer base but contribute 43 percent of the revenues of the sector, with a recovery rate of 98 percent. Industry pays on time, every time providing the bulk of the cash flows of the sector. By cutting electricity to industry, the ill-conceived policy not only destroyed the cash flows of the sector but put the economy at risk.

Adding insult to injury, the government launched an ill-conceived theft and recovery drive, targeting the wrong consumers in the wrong place. Even a cursory review of the data last year would have revealed that private sector collections were in excess of 96 percent across the country. It was the public sector receivables, with 70 percent recovery, that were straining the cash flows of the sector.

Even now the provincial government and agencies combined owe more than Rs86 bln, federal government Rs8.6 bln, AJK Rs35 bln and KESC Rs34 bln to the sector. The government may have netted Rs3 billion of those dues with the latest gimmick of cutting off electricity supply to the President House and other high government offices, but the larger problem persists.

The real menace of private power theft lies not in Punjab, where the campaign was focused, but in rural Sindh, Balochistan and parts of KP. The average losses of the five Discos serving Punjab are 12 percent. The average for the other four is 30 percent.

The theft problem in Punjab was not posed by industrial consumers, which were almost exclusively targeted, but by urban residential consumers in small congested localities, where very large numbers of consumers are fed by a single feeder. They are ably assisted by meter readers who conveniently still conduct ‘manual’ meter reading. And this politically sensitive voter base of urban Punjab was not disturbed during the campaign particularly since their power tariff had just more than doubled.

Which brings us to the most critical component. The losses of the power sector are in reality much more than they’re stated to be. Disco officials have long manipulated figures to prop up their books and show a much better loss and recovery position than is actually the case.

This is standard practice across the board. This often takes the shape of recording average losses, figure-fudging by changing billing dates and bill batches, but most commonly inflated bills to show higher billing to hide losses, often billing people for more than 365 days a year! Provincial governments and departments have long complained of over billing and there is enough evidence to prove their claim. When collections don’t match the over inflated bills, circular debt piles up.

Not only did this chain of events result in a further deterioration of the energy mix, it also set the ball rolling for further deterioration of the precarious cash flows of the sector. By limiting supply to your best paying consumers and then going on a power buying spree, power managers orchestrated a re-emergence of the circular debt. By not plugging the distribution losses and the gaping holes in the governance of the power companies, running the entire sector with bad policy advice, ad hoc management and a corruption-prone manual billing and recovery mechanism, the government is itself responsible for the mess it finds itself in.

And things will not get better. Every single megawatt added through thermal resources to the national grid will result in a worsening of the circular debt – because you’re piling up more debt than you are recovering. More power availability may not make things better. The system is set up for another spectacular failure. Should we expect another spectacular pay-out?